Interior Energy Project: Pentex Purchase & Project Financing Agreements and Analysis. November 2017

Transcription

1 Interior Energy Project: Pentex Purchase & Project Financing Agreements and Analysis November 2017

2 Presentation Summary Project Synopsis Project History Utility Integration Agreements Financial Modeling Next Steps 2

3 Project Synopsis

4 Interior Energy Project PURPOSE AND GOALS Interior Alaska... to bring low-cost energy to as many residents and businesses of Interior Alaska as possible, as quickly as possible... Stabilize the Economy Help Improve Air Quality 4

5 Interior Energy Project PURPOSE AND GOALS Statewide Provide Proof of Concept for an alternative, more sustainable Model of State Development Support Blended Finance ogrant o Low Grant Component oloan o Large Loan Component o Allowance for project-favorable terms obonds o Market-based o State-backed but Project Supported Recognizing that over 100 Alaska Communities, and hundreds of thousands of Alaskans, face the same energy challenge as Fairbanks, design and test a system where the state can, more sustainably, provide necessary project support of critical development even when it is no longer in a position to offer large Grants 5

6 IEP Project Definition Transition Energy Economy from Oil (and Wood) to Cleaner, Less Expensive Natural Gas I. Increase LNG Production Capacity II. III. IV. Increase LNG Delivery Capacity Increase LNG Storage Capacity Increase NG Delivery Capacity V. Support Conversion to NG Use 6

7 Project History

8 Project History FEDC Interior Issues Council Cost-of-Energy Task Force As solutions to high energy (heating oil) cost challenge, advanced: Energy Efficiency Programs Renewable Energy Grant Program and Projects Biomass/Coal/Gas to Liquids Project Expanded LNG Trucking to, and natural gas use in, the FNSB 2011 $500,000 State Appropriation Grant to study expansion of community natural gas distribution capacity and infrastructure 2012 FNSB Gas Distribution System Analysis (GDSA) Interior Gas Utility (IGU) Established by FNSB Cities of Fairbanks & North Pole transfer utility powers to Borough Borough creates IGU as municipal utility $3 Million State Appropriation (grant) to operationalize GDSA and support IGU 2013 Interior Energy Project (IEP) Announced Governor Requests State Financial Support for IEP $332.5 Million Financing Package* $57.5M Grant $125M SETS Loan $150M Bonding Authority *Mandate for North Slope Focus IGU acquires RCA Certifiicated Service Area (CPCN) 8

9 Project History - Continued 2014 FNG System Expansion Year 1 of 2 Pursuit of NS Configuration RFP Process Selection of MWH as partner Customer Conversion Studies IGU Market Study and Conversion Program Analysis CardnoEtrix IEP Natural Gas Conversion Analysis 2015 FNG System Expansion Year 2 of 2 IGU Phase 1 Build-Out Allowance for shift to Cook Inlet (CI) Configuration Pursuit of CI Configuration Salix selected as development partner State (AIDEA) buys FNG/Pentex Short-term, strategic investment meant to allow for unification local utilities under a single Local Control Entity Supported by IGU and, by Resolution, City & Borough Municipalities CardnoEtrix IEP Natural Gas Conversion Sensitivity Analysis 9

10 Project History - Continued 2016 Salix Unwind Precipitated by need for cost reduction against Oil Removal of corporate profits from natural gas cost stack to improve delivered price to consumer Unwind Agreement allowed for: Retention of FEED work to date Retention to FEED Contractors Negotiations to: Transition Pentex LLC into local ownership Unite Local Natural Gas Utilities Finance IEP Total-System Expansion Negotiation of AIDEA / IGU Memorandum of Understanding Between IGU and AIDEA for: IGU Purchase of Pentex AIDEA Financing of IEP 10

11 Project History - Continued 2017 AIDEA / IGU Memorandum of Understanding Executed January 2017 Negotiations to transform MOU-based agreements into actionable Contracts: Purchase & Sale Agreement Financing Agreement Term-Loan Note Work Relative to Agreements: Secure Gas Supply AIDEA HB 105 Resolution Due Diligence of Pentex Assets and Corporation Advance Infrastructure Development LNG Storage facilities in Fairbanks & North Pole Expanded Liquefaction Capacity in Cook Inlet region Advancement of Conversion Analyses and Program Search for new funds to directly support conversion Inquiries into alternative uses for existing funds Characterization of Utility-offered On-Boarding Support On-Bill Repayment Assessment of Alternatives Alternative Supply Sources Alternative Resources Alternative Project Components and Configurations 11

12 Utility Integration Agreements for Pentex Purchase and IEP Financing

13 Purchase & Sale and Financing Agreements Purchase & Sale Agreement (PSA) Financing Agreement (FA) Agreements to finance the purchase of Pentex Alaska, LLC by the Interior Gas Utility (unification of our community s natural gas utilities under local-control) and fund the construction of expanded natural gas liquefaction, transportation, storage, regasification and distribution infrastructure. 13

14 Definitions

15 Definitions IGU Interior Gas Utility Municipal Utility Wholly-owned but independent corporation of the FNSB Created through transfer of utilitypowers by City of Fairbanks and City of North Pole Pentex Alaska, LLC Formerly-private operating utility currently owned by AIDEA Parent Company of: Fairbanks Natural Gas (FNG) Titan LNG Cassini Storage AET AIDEA Alaska Industrial Development & Export Authority Wholly-own corporation of the State of Alaska specializing in lending, investing and project finance Administrator and Lender of State Appropriated IEP Funds IEP Interior Energy Project Official title of local effort to increase natural gas supplies to and through Interior Alaska, and State Funding Appropriated or Authorized to support that effort 15

16 Definitions Titan LNG plants Titan 1 Current LNG plant providing FNG with approximately 1B in LNG Titan 2 New LNG plant, co-located with Titan 1, that will provide 3B in LNG Titan 3 Expansion of the LNG plant (Titan 1 & 2) to meet increased demand as demand materialize. Will provide additional 3B in LNG 16 *1B = 1 billion ft³ of liquid natural gas = approx Million Gallons of fuel oil Also used in this case to denote yearly LNG production capacity (billion cubic feet per year or Bcf/y)

17 17 Definitions Distribution System by Phase IGU Phase 1 Customer service lines and meters for the 73 miles of gas mains installed in core North Pole in 2015 Phase 2 Additional 68 miles of gas mains, along with customer service lines and meters, to cover northern half of North Pole Phase3 128 miles of gas mains, along with customer service lines and meters, running along and anchored on Badger Road FNG Customer service lines and meters for the existing 134 miles of gas mains and expansion of up to 40 miles of gas main.

18 Definitions LNG Storage Small to Large insulated vessels to hold natural gas in liquid state (liquefied natural gas = LNG) until called on for use. Fairbanks 5.2 Million gallons Purpose Built North Pole Two 75,000 gallon bullet tanks Relocated from current Fairbanks storage facility cite 18

19 Project Scope under Agreements

20 Utility Integration Agreements SCOPE (1 of 2) Titan 1 upgrades, Titan 2 and Titan 3 - construction Fairbanks LNG Storage million Gallons - construction North Pole LNG Storage 150,000 Gallons - construction Full build-out of IGU Phases 1-3 Distribution System & FNG Expansion Area Services and Meters Customer Conversion Program 20

21 Utility Integration Agreements SCOPE (2 of 2) Integrated Utility Capital Program Component and Cost Breakdown 21

22 Utility Integration Agreements SCOPE CREATES A FULLY & VERTICALLY INTEGRATED FNSB NATURAL GAS UTILITY 22

23 Pentex Due Diligence

24 Asset Due Diligence Asset Due Diligence Stantec, PDC & CHI Natural Gas Distribution Asset Report LNG Asset Inspection Report Structural Evaluation Report Environmental, Health & Safety (EHS) Program Review Report Major Findings: Though operational and generally sound, existing liquefaction and storage/regas assets contain a number of structural, environmental and health & safety risk factors which should be addressed 24

25 Asset Due Diligence LNG Facility Risk Factors: Structural/Mechanical (High) Health & Safety (Med) Environmental (Low) Mitigation: Construction of new Titan 2 LNG Facility Storage/Regas Risk Factors: ostructural/mechanical (High) ohealth & Safety (Med) oenvironmental (Low) Mitigation: oconstruction of new 5.25M/gal LNG Storage Tank and balance-of-plant facilities 25

26 Corporate Due Diligence - Legal Legal Due Diligence Brena, Bell & Clarkson Corporation(s) Material Contracts Real Property Human Resources Legal Actions/Litigations Financial Environmental Health & Safety Miscellaneous Pentex Acquisition Agreements Major Findings*: Assuming adequate recognition and accommodation within Pentex Purchase & Sale and IEP Financing Agreements (particularly regarding any identified or as yet unidentified environmental items), and timely action on the part of IGU, risks relative to any identified issues appear manageable 26 *IGU Managerial synopsis of legal findings and recommendations

27 Corporate Due Diligence - Financial Financial Due Diligence Stantec & NewGen Governance, Organization and Management AIDEA oversight of Pentex and its subsidiaries Natural Gas System FNG gas operations, financial performance, and rates Accounting and Financial Statements Review of audited and unaudited financial statements and operations reports 27

28 Corporate Due Diligence - Financial Major Findings: Other than SETS Loan, Pentex has very little debt Under AIDEA, operating costs have decreased Though sales and net revenues have decreased since 2013, Cash Flow has increased and company has accrued a substantial positive Cash Balance FNG rates are adequate for meeting current operating expenses and debt service, and normal capital improvements and special equipment Though Pentex s customer base, sales and operating structure remain skewed toward commercial sales, the corporation its personnel, assets and operating systems are sound, and adequate to provide the integrated utility a firm base of support as it transitions to a more residential-customer orientation. 28

29 Major Financial Terms under Agreements

30 Project Financing Funds & Sources Sources of Project Funding Grant Appropriations $57.5M IEP SETS Financing $125M Bond Financing Up to $150M Storage Credit Up to $15M per facility Commercial As Needed Cash from Ops If Available TOTAL (SOA) $332.5M* *Original appropriation/authorization 30

31 Utility Integration Agreements Establishes Key Business & Financial Terms Overall financing plan Commitment of $330M in total to IGU s development & startup Structure of $125M SETS Loans Standards and process for issuance of $150M of AIDEA bonds for IGU capital program IGU purchase of Pentex (including Titan, FNG, all Pentex assets) Process and timing of Infrastructure Development Including Scope Modifications or Revisions Process and timing of System Integration 31

32 IEP SETS Financing SETS financing terms include: Amount $125 million Term 50-year payback Interest Rate 0% for first 15 years followed by 0.25% during 30 or 35 year repayment period Deferment a) Normal Deferral Period: If conversions, and associated demand, materialize as projected, payment of principal and interest is deferred for 15 years with no capitalized interest b) Demand Deferral Period: If conversions, and associated demand, do not materialize as planned, principal payments are deferred an additional 5 years (for a total deferment of 20 years). During additional five-year deferment period, interest-only payments to be made ($312,500 in years 16 through 20). SETS debt service is secondary to AIDEA Bond or Other Bond debt service Required Debt Service Coverage of 1.0 a) b) 32

33 IEP Bond Financing Bonds financing assumptions include: Amount up to $150 million as needed for project financing Term 30-year payback term Interest Rate 4% Deferment payment of principal and interest is deferred for a 3-year period with capitalized interest at 4% during deferment period Debt Service Coverage of 1.20 (typically 1.15 to 1.25 depending on credit rating) 33

34 Financial Modeling

35 IEP Financial Model Used by both IGU and AIDEA to perform economic modeling of the project and estimate dollar-impact different capital, operational and financial terms will have on customer rates and utility finances Updated regularly to reflect latest information, including: Cost of feed-gas Cost of SETS, bond and loan debt service Cost of capital hardware and materials Cost of construction Cost of operations Estimated customer conversion rates And More Modeled Scenarios to follow include: Base Case: Reflective of most up-to-date information, extrapolated into the future Low-Gas Case: Most up-to-date information but modeled using a lower feed-gas price No Growth Case: Stress Test scenario meant to test the integrated utility s financial survivability under worst-case circumstances (large up-front investment but supported only by FNG s current sales volumes) 35

36 Modeled SETS Financing Terms SETS financing terms include: Amount $125 million Term 50-year payback Interest Rate 0% for first 15 years followed by 0.25% during 30 or 35 year repayment period Deferment a) Normal Deferral Period: If conversions, and associated demand, materialize as projected, payment of principal and interest is deferred for 15 years with no capitalized interest b) Demand Deferral Period: If conversions, and associated demand, do not materialize as planned, principal payments are deferred an additional 5 years (for a total deferment of 20 years). During additional five-year deferment period, interest-only payments to be made ($312,500 in years 16 through 20). SETS debt service is secondary to AIDEA Bond or Other Bond debt service Required Debt Service Coverage of 1.0 a) b) 36

37 Modeled Bond Financing Terms Bonds financing assumptions include: Amount up to $150 million as needed for project financing Term 30-year payback term Interest Rate 4% Deferment payment of principal and interest is deferred for a 3-year period with capitalized interest at 4% during deferment period Debt Service Coverage of 1.20 (typically 1.15 to 1.25 depending on credit rating) 37

38 . Modeled Cost and Rate Scenarios 38

39 . Modeled Capital Program Major Items 39

40 . Cardno Studies: Estimate of Single-Family Residential Willingness to Convert Cost of Heating Oil vs Cost of Gas 40

41 . Projected Customers and Demand 41

42 42 Estimated City Gate Price of LNG

43 43 Estimated Average Rate to Consumer

44 . Revenue and Cash 44

45 Financial Modeling Integrated Utility Base Case Scenario $7.72 Feed-Gas Price escalated at 2% after 3 years Conversion Rate: 35% for Residential, 70% for Commercial LNG Production, Storage and Distribution Build-out 45

46 Financial Modeling Integrated Utility Lower-Cost-Gas Scenario $7.72 Feed-Gas Contract followed by $6.00 Contract Conversion Rate: 50% for Residential, 100% for Commercial LNG Production, Storage and Distribution Build-out 46

47 Financial Modeling Integrated Utility No Growth Scenario $7.72 Contract Price escalated at 2% after 3 years 0% Conversion Rate for Residential or Commercial LNG Production and Storage Construction Only 47

48 Financial Modeling Results Under No Growth Scenario (where current customer-base holds but no new customers adopt) utility is in a challenged position but able to continue to operate, provide service and meet its debt service obligations for at least 20 years but having little to no capacity for system expansion. Under Base Case Scenario (where the conversion rate is 35%) the utility is healthy but not able to meet IEP price or immediacy* targets - able to operate, provide service and meet its debt service obligations, and has the resources and bankability to progressively, though slowly*, extend service Under Lower-Cost-Gas Scenario (where the conversion rate is 50%) the utility is not only healthy being able to operate, provide service and meet its debt service obligations but able to proximately achieve the IEP s price, growth-rate and NP air quality impact targets 48

49 Next Steps

50 Next Steps: Immediate Term Continue Public Outreach to Inform and Engage the Public & Policy-Makers Public Information Meeting: Tuesday, November 28, 6-8pm, North Pole Library Special Board Work & Public Comment Session: Thursday, November 30, 6-9pm, FNSB Assembly Chambers Vote on IGU Resolution to Purchase Pentex and Finance Interior Energy Project Development IGU Board of Directors Meeting Tuesday, December 5, 4-6pm, IGU Offices (Key Bank Bldg, 100 Cushman St., Suite 501) 50

51 QUESTIONS